Short-run equilibrium

• Explain, using a diagram, the determination of short-run equilibrium, using the SRAS curve.
• Examine, using diagrams, the impacts of changes in short-run equilibrium.​

Task:  Short run equilibrium occurs where AD=SRAS, this may or may not coincide with the full employment level of equilibrium.  If AD or SRAS change then so will the price level and the level of real income/output/GDP.  You will be given a handout to show short run equilibrium and some tasks in which you will analyse the impact of various scenarios on the economy using AD/SRAS analysis.  

Equilibrium in the monetarist/new classical model

• Explain, using a diagram, the determination of long-run equilibrium, indicating that long-run equilibrium occurs at the full employment level of output.
• Explain why, in the monetarist/new classical approach, while there may be short-term fluctuations in output, the economy will always return to the full employment level of output in the long run.
• Examine, using diagrams, the impacts of changes in the long-run equilibrium.

Equilibrium in the Keynesian model

• Explain, using the Keynesian AD/AS diagram, that the economy may be in equilibrium at any level of real output where AD intersects AS.
• Explain, using a diagram, that if the economy is in equilibrium at a level of real output below the full employment level of output, then there is a deflationary (recessionary) gap.
• Discuss why, in contrast to the monetarist/new classical model, the economy can remain stuck in a deflationary (recessionary) gap in the Keynesian model.
• Explain, using a diagram, that if AD increases in the vertical section of the AS curve, then there is an inflationary gap.

• Discuss why, in contrast to the monetarist/new classical model, increases in aggregate demand in the Keynesian AD/AS model need not be inflationary, unless the economy is operating close to, or at, the level of full employment.

Task:  You will receive another packet to address these objectives and will be practicing drawing graphs and using them to explain long-run equilibrium positions.
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The meaning of aggregate supply - we will watch the video above and you will be given a handout to complete

• Describe the term aggregate supply.

• Explain, using a diagram, why the short-run aggregate supply curve (SRAS curve) is upward sloping.
• Explain, using a diagram, how the AS curve in the short run (SRAS) can shift due to factors including changes in resource prices, changes in business taxes and subsidies and supply shocks.

The AD curve

• Distinguish between the microeconomic concept of demand for a product and the macroeconomic concept of aggregate demand.
• Construct an aggregate demand curve.

• Explain why the AD curve has a negative slope.

The components of AD

• Describe consumption, investment, government spending and net exports as the components of aggregate demand.

The determinants of AD or causes of shifts in the AD curve

• Explain how the AD curve can be shifted by changes in consumption due to factors including changes in consumer confidence, interest rates, wealth, personal income taxes (and hence disposable income) and level of household indebtedness.

• Explain how the AD curve can be shifted by changes in investment due to factors including interest rates, business confidence, technology, business taxes and the level of corporate indebtedness.

• Explain how the AD curve can be shifted by changes in government spending due to factors including political and economic priorities.

• Explain how the AD curve can be shifted by changes in net exports due to factors including the income of trading partners, exchange rates and changes in the level of protectionism.

Aggregate demand is the total spending in an economy consisting of consumption, investment, government expenditure and net exports, i.e. the total quantity of output (Real GDP) that all buyers in an economy want to buy at different possible price levels (Average Price Level).  

You will be given some worksheets to do to address the objectives above, one of them linked to the video below: